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Enron verdicts end an era

Fri., May 26, 2006

HOUSTON – Handing the government its biggest victory in its war on corporate corruption, a federal jury Thursday found former Enron Corp. executives Kenneth L. Lay and Jeffrey K. Skilling guilty of conspiracy and fraud in connection with the 2001 collapse of the onetime energy trading giant.

The convictions cap the Justice Department’s five-year battle to hold top executives of a number of companies responsible for a flood of accounting fraud and corporate failures that undermined investor confidence, put tens of thousands of people out of work and hit the savings of millions of ordinary people.

“The ordinary investor uses the word Enron to scare their kids,” said University of Texas law professor Henry T.C. Hu. “These convictions are the end of a particularly important morality play. Everyone always thought that the Enron-Skilling-Lay trial would be harder for prosecutors … and yet the prosecutors won. That really helps in terms of deterrence.”

Jurors said they rejected the defense that there was no crime at Enron – that Lay and Skilling were unfairly targeted by a government bent on making them the scapegoats for their company’s failure. They said the defendants’ own testimony helped to make up their minds.

“I wanted very, very badly to believe what they were saying,” juror Wendy Vaughan, owner of a roofing business and a fitness company, said at a press conference after the verdict. However, she added, “there were places in the testimony where I felt their character was in question.”

In the end, the jury embraced the testimony of a parade of former Enron executives who said that Lay and Skilling lied publicly about the energy company’s financial health and condoned, if not actively encouraged, the use of accounting tricks to boost reported profits and hide debt.

The verdicts came at the end of a four-month trial, on the morning of the sixth day of deliberations by the panel of eight women and four men. They found Lay, 64, guilty of conspiracy and five counts of fraud – all the charges he faced. They convicted Skilling, 52, of conspiracy, 12 counts of fraud, five counts of making false statements and one count of insider trading. He was acquitted of nine other insider trading counts.

Separately, based on a three-day, non-jury trial, U.S. District Judge Sim Lake found Lay guilty of four counts of bank fraud related to false statements he made while arranging bank lines of credit.

Enron’s implosion was one of the most infamous corporate scandals in U.S. history. The energy company’s failure wiped out more than 4,000 jobs and billions of dollars of stock-market value. Enron’s auditors, then-Big Five accounting giant Arthur Andersen, went out of business after being indicted for obstruction of justice in the wake of Enron’s collapse.

Enron’s bankruptcy exposed failures across the system of corporate governance, from audit companies that lacked true independence and board members who failed to ask skeptical questions to lawyers and bankers who blessed questionable deals in exchange for whopping fees. It also resulted in major changes to the regulatory system, including a federal law that requires top corporate executives to attest to the accuracy of financial statements.

When Enron was followed by a wave of scandals at companies such as WorldCom Inc., Tyco International Ltd. and Adelphia Communications Corp., it was not clear whether prosecutors and the Securities and Exchange Commission would be able to cope with the complexity and sheer numbers of the cases. But government lawyers slowly built their evidence and, after initial setbacks, learned to streamline their cases for juries. They won convictions of WorldCom chief executive Bernard J. Ebbers, Adelphia Chairman John J. Rigas, domesticity entrepreneur Martha Stewart and the top executives of Tyco.

But none of them equaled the importance of Enron, where it all started and which involved the most complicated financial and legal schemes.

“The failure of Enron … fundamentally altered the corporate governance movement forever,” said University of Delaware professor Charles Elson. “It greatly accelerated changes in the form of more responsibility for corporate boards and auditors, and it led to a great skepticism on the part of the investing public as to the business practices in corporate America. Regardless of what happens, they have been inadvertent change agents.”

Lake set sentencing for Sept. 11. He ordered Lay to immediately surrender his passport before releasing both men on $5 million bond. Skilling’s bond had been posted previously, but in a brief afternoon hearing, Lay and his family members were required to pledge their own homes as security for the bond.

Lay and Skilling could be sentenced to several decades in prison.

Leaving the courtroom after the verdict, Skilling was asked for his reaction. He shrugged slightly and stayed silent for a moment, then said softly: “It is what it is.”

Lay remained in the courtroom after the verdict, awaiting the hearing on his bond. He and several family members and a minister joined their hands in prayer. Outside the courthouse later, surrounded by reporters and photographers, Lay once again insisted that he was innocent.

In the course of its investigation, the government obtained guilty pleas from 16 former Enron employees, including Chief Financial Officer Andrew S. Fastow – a star witness for the government – and Chief Accounting Officer Richard A. Causey, who originally was to stand trial with Lay and Skilling but pleaded guilty late last year.

Sean M. Berkowitz, head of the Enron Task Force, said in a sidewalk press conference outside the courthouse that the verdict “sends an unmistakable message to boardrooms across the country: You can’t lie to shareholders and you can’t put your own interests ahead of theirs.”

Several jurors thought Lay’s credibility was severely damaged by evidence that he quietly sold $70 million in Enron stock back to the company in 2001, while telling employees that the company was in fine shape and the stock was a great buy.

Juror Don Martin, an electrical designer, called the sales “a disgrace.”

Lay and Skilling’s legal troubles extend beyond the criminal case. They still face civil fraud charges brought by the SEC, which is seeking disgorgement of ill-gotten gains, fines and a permanent bar against their serving as officers of a publicly-traded company. The agency also charged Lay with insider trading and seeks to recover $90 million that he reaped from stock sales in 2001. The SEC litigation was stayed pending completion of the criminal case.

Private plaintiffs are waiting in the wings as well. Lay and Skilling are defendants in lawsuits brought by Enron shareholders and creditors. Most of those suits have been consolidated into a major class-action case that is scheduled to go to trial in October.


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